The short answer is yes and no. Not all states use your credit score to determine the cost of insurance, but some states do pull your credit when running insurance applications. Even if your state doesn’t allow for credit to influence insurance premiums, you should still know how your credit works, and how it can impact your financial well being.
What is credit scoring?
A credit score is a snapshot of your credit at one point in time. The credit information from your credit report is put through a mathematical formula (credit scoring model) that assigns weights to the various factors and summarizes your credit information into a three-digit number ranging from zero to 850. Many insurers believe that the lower the number, the more likely the consumer will file a claim.
How is credit scoring used to determine insurance rates?
- If your insurance company relies on credit scoring, they may use it in two ways:
- Underwriting — Deciding whether to issue you a new policy or to renew your existing policy.
- Rating — Deciding what price to charge you for your insurance by placing you into a specific rating “tier” or level.
Some insurers use credit information along with other more traditional rating factors, such as claims history. Other insurers may use credit alone to determine your rate. (A new Missouri law prohibits the use of credit scores solely to decide whether to accept you as an auto or homeowners customer, effective July 1, 2003.) Insurance rates based on credit information can vary from company to company; if you feel your rate is too high, shop around.
What affects a credit score?
Several factors determine credit scores. Each factor is assigned a weighted number that, when applied to your specific credit information and added together, equals your final three-digit score. Following is a list of common factors:
- Major negative items — Bankruptcy, collections, foreclosures, liens, charge-offs, etc.
- Past payment history — Number and frequency of late payments.
- Length of credit history — Amount of time you’ve been in the credit system.
- Home ownership — Whether you own or rent.
- Inquiries for credit — Number of times you’ve recently applied for new accounts, including mortgage loans, utility accounts, credit card accounts, etc.
- Number of open credit lines — Number of major credit cards, department store credit cards, etc., that you’ve actually opened.
- Type of credit in use — Major credit cards, store credit cards, finance company loans, etc.
- Outstanding debt — How much you owe compared to how much credit is available to you.
Know your credit history
Your current or prospective insurance company likely is looking at your credit. So review the accuracy of your credit history. Request a copy of your credit history from the credit bureau Equifax, Experian, or Trans Union. You can also contact the Federal Trade Commission for consumer brochures on credit.
The Fair Credit Reporting Act requires an insurance company to tell you if they have taken an “adverse action” against you, in whole or in part, because of your credit report information. If your company tells you that you have been adversely affected, they must also tell you the name of the national credit bureau that supplied the information so that you can get a free copy of your credit report and correct any errors.
Take charge of your credit history
If your insurance company is using your credit score to evaluate your rates, you can take steps to improve your premiums.
- Get a copy of your credit report and correct any errors. Notify your insurance agent and company of any errors.
- Improve your credit history if you’ve had past credit problems. If your credit score is causing you to pay higher premiums, ask your insurer if they will re-evaluate you when your credit improves.
Contact us to see if you can save money on your insurance by speaking to a professional independent insurance agent at Journey Insurance.
Let us sift through the hundreds of insurance programs to find you the most competitive rates available. Let us do the paperwork while you spend your time doing something you actually enjoy!
Journey Insurance Agency * Irvine, California * 888.323.7480
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